Extractive industries and African governments

Photo by Carlos Amarillo

The extractive industries – oil, gas and mining – are absolutely crucial for Africa. In fact, they are the biggest source of exports from Africa into the world economy. For all but a handful of States, the revenues of African governments tend to come from these sectors. This impacts on everything from how these governments deal with the outside world to the way they deal with their own populations.

In terms of international relations, governments that possess oil and natural resources tend to be more empowered in their relations with other States as well as oil and mining companies. Internally, this also makes a difference. African governments with revenues from the extractive industries face less pressure to tax their own populations. They have their own alternative sources of revenue. Because they have this ready source of revenue, they have been less concerned with the development of other sectors. There’s very little incentive for them to develop industrial sectors or agricultural sectors, which in the long term further consolidates their dependence on oil, gas and mining.

How natural resources shape economies

There are many examples of the impact of natural resources on African governance. Nigeria is the largest economy in sub-Saharan Africa and an economy that still had a dominant agricultural sector in the 1960s. In fact, its biggest export sectors were related to agriculture. As soon as oil became the biggest sector, that led to the under-development of almost every other aspect of the economy. From the late 1990s, the financial sector did develop to some extent. But oil remains absolutely central to the economy, and it prevents the development of other alternative sources of income.

Other examples include Angola, which was until recently the third largest economy on the continent. Before the arrival of oil wealth, Angola used to have an economy that was much more diversified. However, in the long term, it has become so dependent on oil revenues that the incentives to produce anything else and to make the hard choices that are necessary for other sectors to be pushed forward are entirely lacking.

These are oil experiences. But there are also countries such as Zambia, one of the world’s leading exporters of copper, or the Democratic Republic of the Congo (DRC), one of the wealthiest countries in the world in mining terms. The impact mining has had on the trajectory of these economies is absolutely dismal.

Is the “resource curse” real?

There’s nothing intrinsic to mining wealth or oil that should account for those outcomes. Some experts have spoken of a “resource curse” whereby states that are wealthy in natural resources paradoxically end up with much worse outcomes in terms of development. But that tends to overstate the direct outcomes that resource wealth produces in terms of poverty and lack of development.

Whether we’re looking at the DRC, Angola or Nigeria, it’s important to examine not just the economic impact of natural resources but the political choices that post-colonial elites have made about development: which sectors they developed, which sectors they neglected, how they governed the economy, what choices they made about investing in the long term. In addition to the economic base of these countries, we need to consider the political story behind the wealth that they have.

Understanding oil in Africa

The first thing to understand in regard to oil in Africa is that Africa has about 10–12% of all the available oil in the world. It doesn’t seem as important as the Persian Gulf or some other parts of the world, but there are some specific points about how oil works in Africa that make it very important. There are many areas of the world, such as the Middle East, where foreign companies are not really welcome. National oil companies owned by those countries extract most of the oil, and they’re not keen on foreign investors to come in and play that role.

Photo by Kodda

Africa is different. As an oil province, Africa is a part of the world where foreign companies are welcome. Companies like Exxon, BP and Royal Dutch Shell can still own acreage. They can still go there and buy oil wells, extract the oil and then have that oil sold in the international system, having had very favourable tax terms from the governments in Africa. Both because foreign companies can access the oil and because the tax terms are very favourable, Africa looms large in the agendas of not just the big Western corporations but also increasingly Asian corporations and corporations from countries such as Brazil.

From that perspective, Africa is central to the global oil economy, especially the global corporate oil economy. This is only one aspect of the many ways in which oil defines the international relations of these States. Contrary to genuinely poor African States, which have very little leverage in dealing with creditors or development agencies from the West, oil-rich countries can dictate the terms of their international engagement to a larger extent than other African countries – at least when oil prices are high.

The ups and downs of oil

Think of a country like Angola, where more than 90% of government revenue comes from oil. When there is a major oil shock – such as from 2014 onwards, with oil prices that were historically very low, even before the coronavirus pandemic – a third of the revenue of these countries disappears. This obviously has a major effect on how they can pay civil service salaries, the armed forces and so on. So part of the effect of oil is this major fiscal shock every time there is a decrease in global oil prices.

On the other hand, there is a strength to being reliant on the oil sector. The first one is that if you were the government of an oil-rich country, you probably made major investments in buying off a loyal clientele. You have parts of the population – middle-class people, civil servants, people in the security sector – that you co-opted during the good years. And sometimes that loyalty does repay itself during the lean years. You’re able to count on some support in this regard.

How troubled States maintain power

Even when the macroeconomic situation is terrible – think of a country like Nigeria, which has suffered so much over the last six years from the downturn – chances are that the State still has power both internally and externally. As a country that is sitting on all of those oil resources, it can still command some respect and dictate certain terms. That might include how it can access IMF emergency funding, or the way it is still able to control parts of State infrastructure, such as the armed forces or the intelligence service, to keep the population from rising against the status quo.

When we speak of failing States, or when we speak of these States from the point of view of their dysfunctions, we tend to have an ideal notion of what these States should be doing in terms of development. From that perspective, they’re not doing well. But from the perspective of sustaining themselves in power and, most importantly, from the perspective of giving those people who are influential in that society an enormously wealthy lifestyle, they’re extremely successful. The failing is relative; it relates to poverty alleviation and broad-based development. But there are nonetheless beneficiaries of these situations.

How resource-rich States can build a sustainable future

It’s important not to be fatalistic. Some people who speak about a “resource curse” seem to suggest these negative outcomes from resource wealth are more or less predetermined, and there’s very little one can do about it. But throwing one’s hands in the air and saying these countries are doomed because of their resource wealth is not the way to go about it.

However, it is nonetheless the case that countries that build their politics, economic infrastructure and institutions around resource wealth and little else do have an uphill struggle in getting out of that resource dependence, partly because other countries in the world economy have moved on. They’ve diversified, they’ve become competitive in other arenas, and these countries haven’t. So part of the solution entails not just the long-term dream of moving beyond oil or mining, desirable as that outcome should be, but rather managing dependence in the short and medium term.

Ways to manage resource dependence

Photo by Natalie Reinch

That means finding ways of putting money aside during the good years, when oil, gas and mining prices are high, to balance the budget in the bad years. It means using techniques such as keeping oil revenues in bank accounts outside the domestic economy to prevent those oil revenues from appreciating the currency of the country that is resource-rich. It means spending resource money more consistently on social sectors: on health, on education, on skills development for the young.

All of these countries have extremely young populations. But even when they had economic growth in the extraordinary decade of boom from 2004 to 2014, resource-rich African countries had jobless growth. The boom never resulted in broad-based prosperity.

These suggestions are not panaceas. They’re sometimes very sectoral, very issue-specific solutions. Pursuing a number of those solutions is not going to fully deal with resource dependence and some of these long-term questions previously mentioned. But it’s going to make the booms, the periods during which oil revenue prices are high, more successful and more broad-based in terms of their positive outcomes. It’s also going to ameliorate the downside of the periods of low prices. It’s going to diminish the negative social impact of the lack of government revenue – such as is the case right now.

Discover more about

Oil in Africa

Soares de Oliveira, R. (2015). Magnificent and Beggar Land: Angola Since the Civil War. Hurst.

Soares de Oliveira, R. (2007). Oil and Politics in the Gulf of Guinea. Hurst.

Soares de Oliveira, R. (2014). Avoiding Africa's Oil Curse. Foreign Affairs.

The impact of the extractive industries in Africa